HC upholds NCLT jurisdiction under Section 95 IB Code dismissing challenge to Resolution Professional appointment proceedings

The HC dismissed a petition challenging NCLT's jurisdiction to entertain an application under Section 95 of the IB Code, 2016. Petitioner contended that NCLT's initiation of proceedings violated IB Code provisions. The court relied on SC precedent in Dilip B Jiwrajka case, which held that parties need not be heard before appointment of Resolution Professional, as sufficient mechanisms exist for hearing after the RP's report submission. The court found no violation of natural justice principles, noting the RP's enquiry is facilitative and recommendatory. The court determined that jurisdictional challenges should be considered by the Tribunal itself, with effective remedies available if the decision is adverse.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court include:

• Whether the National Company Law Tribunal (NCLT) has jurisdiction to entertain applications under Section 95 of the Insolvency and Bankruptcy Code, 2016 (IB Code) against personal guarantors when the principal company has already been wound up;
• Whether the appointment of an Interim Resolution Professional (IRP) by the NCLT at the inception of proceedings under Section 95 violates principles of natural justice by denying the guarantors an opportunity to be heard prior to such appointment;
• The maintainability of writ petitions challenging the orders of the NCLT appointing Resolution Professionals and initiating insolvency resolution processes against personal guarantors;
• The constitutional validity of Sections 95 to 100 of the IB Code, particularly concerning the procedural safeguards and the role of the Resolution Professional;
• The appropriate stage at which jurisdictional facts and maintainability issues should be adjudicated-whether at the time of appointment of the Resolution Professional or subsequently during adjudication under Section 100 of the IB Code;
• The availability and adequacy of alternative statutory remedies to challenge the NCLT's orders and proceedings under the IB Code.

2. ISSUE-WISE DETAILED ANALYSIS

Jurisdiction of NCLT under Section 95 of the IB Code

The petitioners contended that the NCLT lacks jurisdiction to entertain Section 95 applications against them as personal guarantors because the principal company had been wound up earlier by an order dated 28.11.2012. They argued that the insolvency proceedings against guarantors were misconceived and barred by the prior winding-up.

The Court examined this contention in light of the statutory scheme of the IB Code and relevant judicial precedents. The IB Code explicitly provides for initiation of insolvency resolution processes against personal guarantors under Sections 95 to 100. The winding-up of the principal company does not ipso facto oust the jurisdiction of the NCLT to entertain such applications against guarantors. The Court observed that the NCLT is the designated adjudicatory authority under the IB Code and is empowered to examine such applications.

The Court relied heavily on the Supreme Court's ruling in a recent authoritative judgment which upheld the constitutional validity of Sections 95 to 100 and clarified the scope of jurisdiction of the NCLT in insolvency proceedings against personal guarantors. This precedent confirmed that the NCLT's jurisdiction is not barred merely because the principal company has been wound up, and that guarantors can be subjected to insolvency resolution independently.

Appointment of Interim Resolution Professional and Natural Justice

The petitioners challenged the appointment of the IRP by the NCLT as premature and violative of natural justice, asserting that they ought to have been heard on jurisdictional and maintainability issues before such appointment.

The Court analyzed the procedural framework under Sections 95 to 100 of the IB Code, particularly referencing the Supreme Court's detailed analysis which held that no judicial adjudication occurs at the stage of appointment of the Resolution Professional. The Resolution Professional's role is facilitative and investigatory, aimed at collating facts and submitting a recommendatory report on whether the insolvency resolution process should commence.

The Court emphasized that the statute does not require a hearing on jurisdictional facts prior to the appointment of the Resolution Professional. To impose such a requirement would amount to rewriting the statute, which is impermissible. The Resolution Professional's report is not binding and the guarantors have the opportunity to be heard subsequently when the adjudicatory authority decides on acceptance or rejection of the application under Section 100.

Thus, the Court concluded that there is no violation of natural justice at the stage of appointment of the IRP and that the statutory scheme provides adequate safeguards for the guarantors to participate meaningfully at the adjudication stage.

Maintainability of Writ Petitions

The respondents contended that the writ petitions challenging the NCLT's orders are not maintainable as the objections and challenges to the Section 95 applications are pending before the NCLT, which is the appropriate forum for such disputes.

The Court agreed with this position, holding that the writ petitions are premature and misconceived. The Court noted that the petitioners have alternative efficacious statutory remedies available to them to challenge any adverse decisions of the NCLT. It is therefore inappropriate to interfere at this stage through writ jurisdiction.

The Court directed that the maintainability and other preliminary issues be considered by the NCLT as a preliminary matter before proceeding to the merits of the insolvency applications.

Application of Supreme Court Precedent and Constitutional Validity

The Court extensively referred to the Supreme Court's ruling which:

• Upheld the constitutional validity of Sections 95 to 100 of the IB Code;
• Clarified that no judicial adjudication occurs at the stage of appointment of the Resolution Professional;
• Held that the Resolution Professional's role is recommendatory and facilitative;
• Confirmed that principles of natural justice are not violated as the debtor/guarantor is given an opportunity to be heard at the adjudication stage;
• Rejected the contention that a hearing on jurisdictional facts is required prior to appointment of the Resolution Professional;
• Emphasized that the interim moratorium protects the debtor from further legal proceedings during the resolution process;
• Asserted that the adjudicatory authority must observe natural justice principles when deciding on acceptance or rejection of the application under Section 100.

The Court found the reasoning in this precedent directly applicable and binding on the present matter.

Treatment of Competing Arguments

The petitioners' arguments centered on jurisdictional objections, the winding-up of the principal company, and alleged procedural unfairness at the inception of proceedings. The Court rejected these arguments on the basis that the statutory scheme contemplates insolvency proceedings against guarantors independent of the principal company's status, and that procedural safeguards are embedded in the Code.

The respondents' arguments advocating maintainability of the NCLT proceedings and the availability of statutory remedies were accepted. The Court declined to interfere via writ jurisdiction, emphasizing the need to respect the specialized adjudicatory mechanism under the IB Code.

3. SIGNIFICANT HOLDINGS

"No judicial adjudication is involved at the stages envisaged in Sections 95 to Section 99 of the IBC."

"The resolution professional appointed under Section 97 serves a facilitative role of collating all the facts relevant to the examination of the application for the commencement of the insolvency resolution process... The report to be submitted to the adjudicatory authority is recommendatory in nature on whether to accept or reject the application."

"The submission that a hearing should be conducted by the adjudicatory authority for the purpose of determining 'jurisdictional facts' at the stage when it appoints a resolution professional under Section 97(5) of the IBC is rejected. No such adjudicatory function is contemplated at that stage."

"There is no violation of natural justice under Section 95 to Section 100 of the IBC as the debtor is not deprived of an opportunity to participate in the process of the examination of the application by the resolution professional."

"No judicial determination takes place until the adjudicating authority decides under Section 100 whether to accept or reject the application. The report of the resolution professional is only recommendatory in nature and hence does not bind the adjudicatory authority when it exercises its jurisdiction under Section 100."

"The adjudicatory authority must observe the principles of natural justice when it exercises jurisdiction under Section 100 for the purpose of determining whether to accept or reject the application."

"The provisions of Section 95 to Section 100 of the IBC are not unconstitutional as they do not violate Article 14 and Article 21 of the Constitution."

Final determinations:

• The NCLT has jurisdiction to entertain Section 95 applications against personal guarantors notwithstanding prior winding-up of the principal company;
• The appointment of the Interim Resolution Professional without prior hearing of the guarantors does not violate natural justice;
• The writ petitions challenging the NCLT's orders at this stage are premature and not maintainable;
• The petitioners have adequate alternative statutory remedies and must pursue their objections before the NCLT;
• The NCLT should decide maintainability as a preliminary issue before proceeding to the merits;
• The statutory scheme under Sections 95 to 100 of the IB Code is constitutionally valid and provides a balanced framework protecting the interests of all parties involved.

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